[IP] USD3 Collateral Basket Change Proposal #1

Web 3 Dollar (USD3) Web 3 Dollar RFC
1

Summary

Intro to the Web 3 Dollar: USD3 is a decentralized yield-bearing USD stablecoin built on DeFi markets. USD3 is a fully asset-backed currency (“RToken”) created on the Reserve protocol. RTokens feature onchain asset-backing, revenue sharing, overcollateralization and mint/redemptions, governed by RSR stakers. This RToken’s aim is to become the native Web 3 currency.

USD3 is 1:1 asset backed by a basket of yield-bearing tokens. Given the unique design and current market conditions, it is estimated to yield 5-8% APY from the most reputable protocols using the most established assets. USD3 is overcollateralized with auditable proof of reserves available on-chain 24/7.

In this proposal the aim is to discuss options for a possible solution to improve the yield in the USD3 collateral basket

Option 1:
New Basket:
50% sDAI - 9.4% APY
50% Compound USDC - 9.7% APY

Option 2:
New Basket:
33% sDAI - 9.4% APY
33% Compound USDC - 9.7% APY
33% Aave USDT - 4.87% APY

Option 3:
Maintain Current Basket:
33% sDAI - 9.4% APY
33% Compound USDC - 9.7% APY
33% Aave pyUSD - 0.11% APY

Abstract

Currently the yield from the Aave pyUSD part of the basket has dropped to almost 0%. This has led to discussions on how to address this problem. The proposal could result in a basket change to Option 1 or 2, or, in leaving the basket as is(Option 3).

Problem Statement

Option 1:
Removing the Aave pyUSD part of the basket and replacing it with 50% sDAI and 50% Compound USDC, will lead to an increase in yield for USD3 holders. This change decreases the diversification, but remains within acceptable risk parameters.

This option lowers the cost of gas to mint which could potentially improve the demand for USD3. It also aligns with the many DAO’s common holdings of USDC and DAI.

Option 2:
By replacing the Aave pyUSD part of the basket with Aave USDT, this option will keep diversification similar. It would also result in an improvement of the overall yield profile. According to the Register App, the yield from Aave USDT is 4.87% APY.

According to Bluechip, Tether has a “D” rating. There needs to be further discussion before considering this option. Does this asset fall within USD3s mandate? Will Tether work to increase their rating? Does Tether want to be a part of USD3?

To highlight some pros as to why Tether is a part of this proposal, consideration needs to be given to the following:

Tether has a market cap of over 100B TVL, there is over 3 times as much Tether held as USDC and pyUSD combined.

Tether’s daily volume is greater than 7.5x the daily volume of USDC and pyUSD combined. Bluechip.org themselves, recognize that USDT:

  • is the longest surviving stablecoin in circulation.
  • has lived through multiple stress tests, regaining its dollar peg each time it was tested.
  • USDT’s issuer has consistently fulfilled all redemptions, despite widespread accusations of USDT not being fully backed by reserves.

Option 3:
Can Paxos or Trident be engaged to incentivize the yield for borrowing and supplying pyUSD in Aave?

PayPal is a globally recognized financial services provider. Continuing the integration of pyUSD in the USD3 collateral basket can leverage their reputation, potentially continuing to attract new users who trust PayPal’s brand and services, and by extension Paxos the issuer of pyUSD.

By enrolling outside parties into an involvement with USD3 this option will help drive awareness and demand for USD3. Scalability of the Aave pyUSD position can be interpreted as a limiting factor however. As USD3 continues to grow the Aave pyUSD supply and borrow ceiling can continuously be increased to fit our needs. Therefore, the current basket is very scalable.

Rationale

Discussions on how to improve USD3 are a net positive. If an improvement to the collateral basket and yield can happen without increasing risk, that could increase the probability that more people will want to hold USD3.

Risks

Option 1:
Removing the Aave pyUSD part of the basket and replacing it with 50% sDAI and 50% Compound USDC V3, this change decreases diversification, but does not increase the risk profile. Scalability remains unchanged, and minting costs will decrease.

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Option 2:
By replacing the Aave pyUSD part of the basket with Aave USDT, this option increases the risk profile. The scalability and cost of minting remain the same. It is up to the governors to interpret if adding Tether into the collateral basket fits within the bounds of the mandate.

Option 3:
The risk here is not being able to increase the APY of the Aave pyUSD position. This will take collaboration from outside parties and engage them in the success of USD3. This seems like a big task. The risk here is not being able to engage outside parties.

  • Option 1: 50% sDAI 50% Compound USDC
  • Option 2: 33% sDAI 33% Compound USDC 33% Aave USDT
  • Option 3: No change to the current basket
0 voters
3 Likes
2

Heyo, Tom…

I think the idea that USD3 is made up of assets that have a B rating or higher on the Bluechip website should be respected… By including Tether in the basket the APY would increase by about 8% if I’m not mistaken but we would no longer respect that “golden rule” that I mentioned at the beginning.

By taking option A (sDAI & Compound USDC) the APY would be about 9.5%, the golden rule would not be broken and minting would be a little cheaper, but diversification would be a little affected… I prefer this while waiting for some other solution, or while we see how those in charge of PYUSD improve their relationship with DeFi protocols to offer better yield.

Then I would lean more towards option A.

2 Likes
3

I support a basket change given pyUSD’s (currently quite) negative contribution to USD3 APY. Taking the change ambition as a starting point, I would value and prioritize Bluechip grade over retaining current diversification levels. One of the purposes of diversification is spreading and/or lowering the risk, yet introducing USDT-based assets would actually increase the risk measured by Bluechip grading. Reduced minting costs and (relative) APY impact are considerations as well of course, but secondary to me. I vote for Option 1.

2 Likes
4

Agree with the comments above.

It’s a balancing act between yield, risk and diversification and while the addition of Tether to the basket improves diversification it compromises the other two more than i’d personally be willing to accept.

Also you said it yourself Tom that option one aligns with many DAO’s common holdings USDC and DAI and as it is a pillar of the GTM plan to attract DAO treasuries and SLPs, I wouldn’t want to alienate them by adding in Tether.

I do personally think a 3 asset basket would sit better with DAOs and SLPs as it ticks the diversification box but happy to wait for a more appropriate asset.

3 Likes
5

Agree that pyUSD is a drag and should be replaced/removed.

I don’t know that I agree with Bluechip’s USDT rating, but if it was previously implied that they would be abided by, it makes sense to keep that rule.

Another piece of info that would be helpful is the historical yields for each option. I wonder what is the best way to pull this info? Although perhaps its a moot point if USDT is out of the question.

3 Likes
6

I agree that USDT should not be included given USD3’s mandate and its rating from Bluechip and S&P.

5 Likes
7

I agree with you regarding the choice of option 1. Even if we go from 3 assets to 2 assets, there are solid collaterals which will allow not only to remain within the framework set for this Rtoken but in addition to increase profitability for stakers. I think this is a good solution while waiting for new possibilities in the future. Finally, on a personal level and being French, I will say that the USDT option does not appeal to me in view of the regulations that will soon be enforced in Europe.

2 Likes
9

Welcome to the Forum Aslan :wave:t2:.

2 Likes
10

Summary

In this proposal the aim is to discuss options for a possible solution to improve the yield in the USD3 collateral basket

Current Basket:
33% sDAI - 8% APY
33% Compound USDC - 7.9% APY
33% Aave pyUSD - 3.5% APY

New Basket:
33% sDAI - 8% APY
33% Compound USDC - 7.9% APY
33% Metamorpho Steakhouse pyUSD - 13% APY

Abstract

Removing the Aave pyUSD part of the basket and replacing it with Metamorpho Steakhouse pyUSD Vault, will lead to an increase in yield for USD3 holders. The proposed proposal, if enacted, could result in a change to the USD3 collateral basket. By maintaining a third asset in the collateral basket the diversification remains unchanged.

Problem Statement

Currently the yield from the Aave pyUSD part of the basket has dropped to 3.5%. This has led to discussions on how to increase the yield for the pyUSD part of the basket.

Rationale

MetaMorpho:
MetaMorpho is a protocol for permissionless lending vaults built on top of the Morpho Blue. MetaMorpho vaults have one loan asset(in this case, pyUSD) and can allocate deposits to multiple Morpho Blue markets. MetaMorpho vaults are noncustodial and immutable instances. MetaMorpho vaults offer users a way to provide liquidity and earn interest passively. Vaults have a system to automate risk management so that users are not required to make these decisions. Instead, the vault actively curates a risk exposure for all deposited assets. The vaults operate in a noncustodial way and users maintain full control over their assets.

The MetaMorpho Steakhouse pyUSD vault aims to optimize yields lending pyUSD against blue chip crypto assets and real world asset (RWA) collateral markets, depending on market conditions.

The collateral in the pyUSD vault is composed of 98% of the following assets USYC(59%), wBTC(27.5%), and wstETH(11.5%). USYC is the on-chain representation of Hashnote’s Short Duration Yield Fund (SDYF). SDYF invests in short-term US Treasury Bills and performs repo / reverse repo activity as the underlying asset of the USYC token. USYC earns short-term risk-free rate returns.

The platform offers institutional investors a secure environment free from the everyday risks linked to credit intermediaries because they do not provide loans. Hashnote US and offshore funds are regulated by the Commodity Futures Trading Commission (CFTC) and Cayman Islands Monetary Authority (CIMA), respectively, and Hashnote Management is a member of the National Futures Association (NFA). They adhere to strict regulations set by the CFTC and CIMA, ensuring their operations meet institutional investment standards. Assets are protected through segregated custodial accounts at BNY Mellon, guaranteeing direct access for shareholders and a high level of asset security.

Risks

The risk here is ensuring this change falls within the mandate. Morpho, according to DeFiSafety, has a 98% safety rating.

The 13% APY has a few parts to consider, the native yield on the vault is 4% with an additional 5% in Morpho. Currently Morpho is planning to onboard Paxos to add an additional 3-4% on top. The total projected APY will be 13%, the complexity of the origins of the yield are greater. However, the 13% APY is superior to the current 3.5% Aave pyUSD yield.

The other risks involved are smart contract risks. MetaMorpho has undergone 3 major audits to date: Spearbit, Open Zeppelin, and Cantina Contest.

  • I am for: Metamorpho Steakhouse pyUSD
  • I am for: 50% sDAI 50% Compound USDC
  • No change to the current basket
0 voters
11

Hey @0xTomSawyer

It is a pleasure to see this proposal. Indeed Steakhouse PYUSD [Morpho Blue | Earn)] would be a great alternative to the current Aave strategy: USD3 holders would earn 4% native yield + MORPHO tokens + 3-4% APY from Paxos (the vault is being onboarded as we speak). So you could expect a floor of 7% + MORPHO which is at least 2x current Aave rates.

As the basket is being changed, it also could make sense to suggest a change to Morpho for the Compound USDC part as well Gauntlet USDC Prime or Steakhouse USDC could be great opportunities to consider given they are yielding 8-10% of native APY + MORPHO and expose Reserve only to wstETH and WBTC collateral.

Really excited about Morpho and Reserve having the opportunity to strengthen their partnership!

12

100% agree that Metamorpho should be the replacement for Aave pyUSD.

When I saw the new collateral plugins that were created recently, the Metamorpho SteakHouse pyUSD plugin really caught my attention… I’m glad you took a look at it and chose it to be the new option to consider for the USD3 basket.

2 Likes
13

Thanks for jumping in here @0xloth - Given that the market is only ~$12m in PYUSD that is being lent, can USD3 reasonably expect that the 7% would stay the same after depositing ~$8m? or would it drop by 8/12?

Concern on my end is that the current market only has $1.3m of liquidity, so dropping $8m in here might get eaten up quickly and make it difficult for USD3 to exit given that 40% of the lending market would be composed by the USD3 backing.

Would be worried about USD3 depositing to much more than current liquidity limit unless Morpho or Paxos, at a minimum, is willing to commit to increasing incentives to this market as the market increases in size.

2 Likes
14

Hey 0xloth

I appreciate the response but I share the same concerns as Thomas. Currently the Aave pyUSD part of the basket represents roughly $8m. As a general rule of thumb we do not want to exceed 10% of the liquidity of any asset or position. The Morpho Steakhouse pyUSD vault size($12m) does not let us proceed safely. The other aspect in question, will the expectation of yield remain the same after the deposit of 8m? My concerns for the USD3 holder and RSR staker outweigh the benefit of moving forward with the Morpho Steakhouse pyUSD vault.

The problem lies in the event of wanting to change the basket while representing greater than 10% of the liquidity. The process to change the basket would most likely result in slippage at the expense of the RSR staker.